A call option is a contract giving the owner the right, but nit the obligation, to buy, or buy short, a specified amount of an underlying security at a pre-determined price within a specified time frame. The pre- determined price the call option buyer can buy at is called the strike price. Call options are traded on various underlying assets, including stocks, currencies, bonds, commodities, futures and indexes. a) Suppose that an American call option to buy a share for S$10 cost S$2 and is held until end of the year. Under what circumstances will the buyer of the option make a profit? Undet what circumstances will the option be exercised? b) Suppose that you own 1 000 shares worth S$10 each. How can call options be used to provide you protection against the decline in the value of your holding shares over the next four months?
A call option is a contract giving the owner the right, but nit the obligation, to buy, or buy short, a specified amount of an underlying security at a pre-determined price within a specified time frame. The pre- determined price the call option buyer can buy at is called the strike price. Call options are traded on various underlying assets, including stocks, currencies, bonds, commodities, futures and indexes. a) Suppose that an American call option to buy a share for S$10 cost S$2 and is held until end of the year. Under what circumstances will the buyer of the option make a profit? Undet what circumstances will the option be exercised? b) Suppose that you own 1 000 shares worth S$10 each. How can call options be used to provide you protection against the decline in the value of your holding shares over the next four months?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:A call option is a contract giving the
owner the right, but nit the obligation,
to buy, or buy short, a specified
amount of an underlying security at a
pre-determined price within a
specified time frame. The pre-
determined price the call option buyer
can buy at is called the strike price. Call
options are traded on various
underlying assets, including stocks,
currencies, bonds, commodities,
futures and indexes.
a) Suppose that an American call
option to buy a share for S$10 cost S$2
and is held until end of the year. Under
what circumstances will the buyer of
the option make a profit? Undet what
circumstances will the option be
exercised?
b) Suppose that you own 1 000 shares
worth S$10 each. How can call options
be used to provide you protection
against the decline in the value of your
holding shares over the next four
months?
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